Annex Newsflash 2005-33                            October 27, 2005


Updated 12/01/05, 00:10AM MST (adds Fujitsu, Red Hat Linux Alliance)

Analysis of Fujitsu's First Half FY05 Business Results

Cautious Optimism

Fujitsu Executives Try and Succeed in Talking Down Their Better-Than-Expected Earnings

NEW YORK, Oct 27 - When Fujitsu revised upward (+57%) its first half 2005 profit forecast 10 days ago, its executives sounded intent on toning down the stock market optimism.  They left the full year earnings forecast intact.  They repeated it today as the company released its actual results.  

"We'd like to play it safe because the majority of our sales and profits tend to come in the final quarter of each business year," Fujitsu's CFO, Masamichi Ogura, told a Tokyo news conference, according to Reuters. "We first want to focus our effort on achieving our initial target."

Fujitsu executives seem to have finally succeeded in curbing the rise of their stock.  Even though Fujitsu's actual net profit for the second quarter (Jul-Sep) was up 40% percent to 5.17 billion yen ($44.6 million), the stock took a 1.8% dive - three times steeper than the 0.6% decline of the electronic machinery's index on the Tokyo stock exchange.  Despite the one-day blip, however, Fujitsu shares are up more than 35% for the last six months (see the chart).  That's one of the more impressive performances among the global IT stocks.

Fujitsu said its profit rose sharply thanks mostly to improved margins in its software and services business, one of the problem areas in the past (see "Fujitsu Revenues Flat, Lower Net," Apr 2005), and due to a robust telecoms demand.  Fujitsu executives said they achieved better profitability in services by carefully screening new projects.  

Fujitsu's results were also boosted by the robust performance of its chip package unit, Shinko Electric Industries, and by brisk sales of mobile phone base stations.  The company also benefited (to the tune of 10.0 billion yen in other income) from a reduction in amortization of unrecognized obligation for retirement benefits, due to a change in the pension system.  

Sales for the latest quarter fell 3.8% to 1.17 trillion yen.  Fujitsu had warned in its earlier forecast revision that the first half revenues may be down about 0.4%.  For the full fiscal year (that ends Mar 31), Fujitsu expects its sales to reach 4.8 trillion yen, slightly down from its original 4.85 trillion forecast.

Fujitsu, maintained its forecasts for group net profit outlook of 50 billion yen for the current business year, an increase of 57% from a year earlier, but short of the consensus of 56 billion yen in a poll of 19 analysts by Reuters Estimates.  So Tokyo analysts see a good chance of an upward earnings revision ahead, according to the Japanese media reports.

Fujitsu, EDS Form Server Alliance

Two companies to challenge IBM, HP along new technology front

NEW YORK, Nov 4 - Fujitsu and EDS formed a new server alliance today as the two companies announced that EDS would become an integrator and distributor of Fujitsu's Intel-based servers.  Calling it a global Technology Alliance Agreement, the two companies said Fujitsu would provide EDS with its " high-performance computing platforms such as the PRIMEQUEST line of mainframe-class servers," along with its Stylistic and LifeBook Tablet PCs.  Under the agreement, Fujitsu platforms will be incorporated in EDS' solutions and are expected to be available to enterprise customers worldwide starting in North America.

Fujitsu plans to sell 2,000 units of its Primequest servers to EDS over the next three years, a Fujitsu spokeswoman told Reuters in Tokyo.  That is part of Fujitsu's plan earlier this year to sell 10,000 units of the new servers using Intel Corp.'s Itanium 2 processors in three years, bringing in some 150-200 billion yen ($1.28-$1.71 billion) in revenues, Reuters said.

Tokyo investors reacted favorably to the news, boosting Fujitsu's shares by almost three points to 772 yen.

"Our goal is to deliver the latest innovations in mainframe application migration to our clients," said Larry Lozon, vice president, Data Center Services, EDS, in a statement. "With the Fujitsu PRIMEQUEST Intel Itanium-based servers, EDS expects to deliver the most reliable and cost effective solutions in an open environment with the same level of performance and reliability previously enjoyed by our customers in a mainframe environment."

"Intel welcomes the technology alliance between Fujitsu and EDS,"
said Kirk Skaugen, General Manager, Server Platforms Group, Intel

"Fujitsu looks forward to seeing our mission-critical technology being incorporated in solutions from EDS, a company with a wealth of global outsourcing and system integration experience," said Akira Yamanaka,
Corporate Vice President, Fujitsu Limited.

Sounds like a challenge to IBM mainframe, at least on paper?   Except that calling the Itanium-based servers "mainframes" doesn't make them mainframes.  That's a distinction that one earns in the IT industry by delivering the mainframe-class performance and functions.

Meanwhile, the formation of this technology alliance is a step in the direction we suggested back in July 2004 Fujitsu might take if it is to be considered a truly global player.  Here's an excerpt from that Annex Bulletin:

...Setting its sights on EDS as a possible acquisition target could be a way for Fujitsu to kill two birds with one stone.  It could become the second largest IT services provider in the world, practically overnight.  And it could acquire a widely recognized global brand name.  With some spit and polish, and with new (American) leadership, EDS could easily regain its former luster.  And Fujitsu would finally break out of its 25% to 30% overseas market share barrier.  It would be a win-win deal.

Do Messrs. Akikusa and Kurokawa have what it takes to carry out such a bold play? Time will tell… 

(An excerpt from "Back in the Black," Annex Bulletin, July 26, 2004)

Well, this new technology alliance is certainly not an acquisition.  Only fools or the ignorant would be buying EDS at its current inflated stock prices.  But it is a second step that the two companies have taken which is bringing them closer together.  The first one took place back in March when they partnered in a major win of a U.K. Defense "megadeal" (see "Whitehall Rumor lifts EDS, Fujitsu shares," Mar 1, 2005).

As a Technology Alliance Partner, Fujitsu said it is "looking forward to working closely with EDS to provide outstanding platforms for EDS' solutions."  And we can see why there is much upside in the relationship for Fujitsu from a global market share viewpoint.

From an EDS standpoint, however, the company may be losing one of the important marketing advantages that a "pure" IT services firm has over IT conglomerates, such as IBM or HP.  The EDS customers may no longer consider it to be "color blind" when it comes to technology selection.  

Whether or not such a "penalty" is worth the price will depend on how good a deal Fujitsu is offering EDS on its new servers.  One would hope, for the sake of EDS shareholders, that they are priced considerably lower than the competitors' offerings to make business sense.  As for the Fujitsu shareholders, well... they can always applaud the market share gains.  For now.

Either way, Fujitsu-EDS-Intel seem to be forging a new technology front along which they may challenge IBM and HP, if not even Dell.

Fujitsu, Red Hat, Intel Extend Linux Alliance

Another challenge to IBM along new software front

SCOTTSDALE, Dec 1 - Fujitsu seems to have taken another page out of IBM's "systems agenda."  By extending its alliance with Red Hat, originally announced in May 2003, and extended in early April of this year, the largest Japanese computer company seems to be aiming at both "openness" and "innovation through collaboration," two of the three tenets of IBM's "systems agenda".  Red also an IBM Linux market partner.

Earlier in November, Fujitsu also announced a strategic technology partnership with EDS.  

Fujitsu and Red Hat today announced today that, under their global agreement to provide Linux solutions, they will collaborate in porting applications to Fujitsu mission-critical PRIMEQUEST Intel-based servers, running Red Hat enterprise Linux.  The two companies plan to expand their joint promotional activities surrounding porting services for Linux applications from the Japanese market through Europe, the Americas, and other areas within Asia Pacific.  They will be targeting competitors' UNIX servers and 32-bit Linux applications.

And the Japanese stock market liked what it saw.  The Fujitsu shares rose more than a point today to 885 Yen, approaching a four-year high.

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2005 IT:  Fujitsu's Cautious Optimism (Oct 2005); Global Investments: Yin-Yang Pacific Tsunamis (Oct 2005); IBM: Springboard Quarter (Oct 2005); Top Wall St Firms Bump Up Investments  (Oct 2005); Accenture: A Whopper Quarter  (Oct 2005);  Global Investments: New "Drang Nach Osten" (Sep 2005);  HP: Sweet Turnaround (Aug 2005);  Dell Spooks Street (Aug 2005);  EDS Ups Its Forecast (Aug 2005);  Capgemini Beats Forecast (July 2005);  Fujitsu: Losses Reversed; Forecast Upgraded (July 2005);  IBM: Polaris Eclipses T-Rex (July 2005);   IBM Bounces Back (July 2005); Accenture: Smashing Records (July 2005); Merrill's New Bull (EDS) (May 2005);  IBM Trumps Trump (May 2005);  Tweaking Big Blue (May 2005); Hurd's First RBI (May 2005); Dell Rings the Bell (May 2005); Stock Buybacks: The Phantom Is Back (May 2005); EDS Misfiring on All Cylinders (May 2005);  HP Surges, Dell Slumps; Lenovo Completes IBM Deal (May 2005);  Fujitsu Revenues Flat, Lower Net (Apr 2005); Capgemini Jettisons Healthcare in N.A. (Apr 2005); HP: From India to Poland (Apr 2005); IBM: Slammed and Dunked (Apr 2005); Hurd Advice: Up Mount Market Cap (Apr 2005); Accenture: Roaring Ahead (Apr 2005);  Fujitsu Unveils New Servers (Mar 2005);  EDS Executive Suite; HP's New CEO (Mar 2005);  An iSeries Revival (Mar 2005); EDS Booster Club Fees Rise (Mar 2005);  An Upside-Down View (Mar 2005);   The Worst of Both Worlds (Mar 2005);  Octathlon 2005: Accenture Wins (Mar 2005);  IBM Global Services: Smaller, Shorter - Better? (Mar 2005);  IBM 5-yr Forecast: Quality over Quantity (Mar 2005); Rumor Lifts EDS', Fujitsu's Shares (Mar 2005); Capgemini: Turning the Corner (Feb 2005);  IBM Servers to Grow Again (Feb 2005);  Carly's Fickle Fans (Feb 2005);  CSC: Gearing Down on Purpose (Feb 2005);  EDS: Grossly Overpriced Stock (Feb 2005);  IBM Historical Update: 2004 Shot in the Arm (Feb 2005); New HeadTurners Series #1 (Feb 2005); IBM: A Crescendo Finale! (Jan 2005); Accenture: Strong Finish, Better Start (Jan 2005); Annex Coverage 2004: IT Services Dominate (Jan 2005)

2004 IT: EDS: The Titanium Stock (and other Wall Street tales) (Dec 2004); IBM PC: Good Riddance (Dec 2004); Fujitsu: Recovery Continues (Nov 2004);  IBM Server Renaissance (Nov 2004);  HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004);  To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004)IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004);  EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

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Volume XXI, Annex Newsflash 2005-33
October 27, 2005

Bob Djurdjevic, Editor
(c) Copyright 2005 by Annex Research, Inc. All rights reserved.

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